Webinar Recap, Part 2 of 3: How to Detect and Prevent Accounts Receivable Fraud in Your Organization

Receivable Savvy hosted a webinar in February featuring Chris Doxey, CAPP, CCSA, CICA, CPC. The purpose of the webinar was to help participants gain understanding on how to detect and prevent Accounts Receivable fraud in their organizations. Following is the second entry in a series of excerpts from that webinar.

What are some recognized standards to help prevent fraud?

There is an SEC standard, Staff Accounting Bulletin (SAB) 104, that defines when revenue can be recognized on your company books. There are four criteria to this standard. First, there should be persuasive evidence of an arrangement with a reseller or a channel. Second is making sure that delivery has occurred or services have been rendered. Third, the seller’s price to the buyer has been fixed or is determinable. Fourth, collectability is reasonably assured. So that means you have not made a partial shipment, and/or you haven’t shipped a product if it’s damaged or is missing parts.

From an audit standpoint, I spent a lot of time in the distribution business as a controller and in logistics with both Digital Equipment Corporation and Compaq, so when we had our quarterly audit process, we would actually be reviewed to make sure that we were shipping product according to quarterly cut-offs, and that everything was shipped according to SAB 104. These revenue recognition regulations are very, very important, particularly from an accounting process, and certainly they need to be adhered to, for not only the SEC regulations but to protect against fraudsters.

What is reasonable when trying to get a handle on employee fraud and stopping it before it occurs?

What is considered reasonable is having a good series of internal controls and some reasonable checks and balances. For instance, you would want to have some controls over your customer master and that would mean making sure no one is setting up a phony company. Typically, the responsibility for the customer master should be segregated. In addition, the accounting process for accounts receivable and credit and collections should be separated. Perhaps the most important control is the accounts receivable record should be reconciled on a monthly basis. In addition, aging should be properly reconciled, and credit and collection activities should be reviewed with accountability for the credit and collection process. The cash application process should be totally separated from the customer master, accounts receivable, and credit and collection. Ideally, there should be separate departments with separate teams.

Does automation have a role to play in helping to reduce fraud?

We can use reporting from ERP systems to look at how a company has things set up and see what the processes are telling us; looking at the pieces of the puzzle to see what the whole story is. This could be done by running reports and seeing if the automation we have in place can explain whether we’ve got problems with invoices, for example. The flip side of that is, we have automated payments with customers actually paying us with ACH. We can see if they are short paying, if there are issues with invoices, or if there are things to see from a shipping perspective.

Yes, automation can play a big role in identifying these things and preventing them from happening. Every ERP system has the financial closing process built right in, so that can be used for analytics and reporting.